Yesterday, the U.S. Supreme Court decided Hall Street Associates, L.L.C. v. Mattel, Inc., a case under the Federal Arbitration Act, holding 6-3 that parties cannot enforce provisions in an arbitration agreement that provided for additional (though still limited) judicial review of the arbitrator’s decision. Instead, regardless of the contract terms, the parties can only get the baseline level of judicial review provided by the statutory background. The FAA thus presents contracting parties with a binary choice: take arbitration under the statute or take normal civil litigation.
News of this case was generally (and unsurprisingly) buried in light of the much sexier Medellin v. Texas decision.
But the blogosphere that deals with civil litigation recognizes Hall Street as marking perhaps a key moment in the relationship between courts and the arbitration system.
At Blawgletter, the view expressed is that this strict holding may “encourage more serious attention to the arbitral process itself.” Or, at the least, it may encourage litigants to use “appeals” provided by the bodies governing arbitration.
To an appellate lawyer used to dealing with real courts and real law, a private “appellate” system is curious. Blawgletter cites to an example set of rules for arbitration appeals that, so far as I can tell, describe a trial with a closed record and a narrower standard of review (“the same standard of review that the first-level appellate court in the jurisdiction would apply to an appeal from the trial court decision”). The role of “appellate advocacy” in such a system — where any legal interpretation will not be precedential and only the parties before the panel are affected in any way — seems to demand a wholly different set of analytical and persuasive tools than appeals in the judicial system itself. If any readers have handled an arbitral “appeal,” I’d love to hear your thoughts on the process.
At the Texas Appellate Law Blog, in a post titled “U.S. Supreme Court Invalidates Custom Standards of Judicial Review Under FAA,” the concern expressed is that the majority in Hall Street did not specify what background level of judicial review remains beyond the statute itself. If review of FAA awards is truly limited to the “exclusive” provisions of the statute, is there still room for “manifest disregard” or “public policy” review?
I suspect that the way to read Hall Street is that the parties cannot, by their own agreement, expand the jurisdiction of the federal courts to review arbitral awards. I would be surprised if — in some later case where the issue was squarely presented — the Court concluded it was bound by Hall Street to hold that Congress meant the FAA to require contracts that were invalid as against public policy (for example) to be enforced by the courts.
But in Texas … some of the fallout from Hall Street may come sooner rather than later.
In January, the Supreme Court of Texas heard oral arguments in Bison Building Materials, Ltd. v. Aldridge, No. 06-1084 [docket sheet]. In that case, the court of appeals held — and the parties agreed in their briefs — that the agreement was covered under the FAA. And the arbitration agreement provided for expanded judicial review — that a suit could be filed “to set aside the Award, where the standard of review will be the same as that applied by an Appellate Court reviewing a decision of a Trial Court sitting without a jury.” An arbitration proceeding was initiated and dismissed. The losing party filed a suit seeking that expanded, appellate-style review from a Texas district court. The district court issued an order requiring more fact-finding on the issue that led to dismissal. After an appeal was filed, the court of appeals held it lacked interlocutory appellate jurisdiction over that order.
The petition for review (at page eight) begins with the premise that the FAA permits parties to an arbitration agreement to provide for additional levels of judicial review beyond the statute. The same argument was advanced at oral argument. Both parties embraced that premise and seemed to agree that any challenge to it was waived. Thus, both sides seem to urge the Court not to address the Hall Street question.
But, after Hall Street, a federal court hearing the same case would have to reject the very premise of this lawsuit. And it appears (from oral argument) that at least some of the Justices on the Texas Supreme Court are concerned that it, too, must first decide the scope of the district court’s power to make sense of the issues. Unless the Court finds that this issue has been waived under Texas procedural rules, Bison Building Materials may well speak to how Hall Street applies to Texas state cases brought to enforce FAA arbitration agreements.